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A 122-page report by the Treasury select committee, after an inquiry in July in the aftermath of Barclays’ Libor fixing fine, claimed it was “not good” that both the FSA and the Bank of England failed to spot manipulation at Barclays despite the US regulator being alert to it.

The report said: “The committee is concerned that the FSA was two years behind the US regulatory authorities in initiating a formal Libor investigation and that this delay has contributed to the perceived weaknesses in regulating financial markets.”

The document highlighted a note from president of the Federal Reserve Timonthy Geithner about enhancing the credibility of Libor and revealed the FSA was investigating whether its staff knew of this.

During the hearings, the Bank of England - part of the tripartite regime - denied receiving evidence of wrongdoing from the US Federal Reserve.

The report also claimed Barclays was clearer with the New York Fed than with the FSA, which described its dealings with the bank as “elliptic.”

The report claimed the BoE was “relatively inactive” and did not speak with the FSA about the possibility of Libor fixing.

But more of the ire was saved for the City watchdog, the document said: “Unlike the BoE, the FSA was the prudential regulator. Its shortcomings at this time are therefore far more serious.

“The TSC is concerned about the FSA’s failure to appreciate the significance of market rumours relating to the artificial rigging of the Libor rate.”

The MPs said they awaited eagerly the result of the FSA’s internal investigation into the crisis, expected later this year.

Also in the report, MPs said the FSA must be clearer when communicating concerns about bank staff and improve its compliance and be more flexible in fines for firms that co-operate with investigations.

Firms must also be encouraged to report instances of wrongdong to the regulator.

The MPs also suggested that the Wheatley Review into Libor should address whether there is a legislative gap that stops the FSA pursuing criminal charges on this issue, while the Serious Fraud Office is able to pursue its own case.

The British Bankers’ Association, which is responsible for Libor, also drew criticism, having reviewed rate-setting in 2008 but missed the opportunity to spot the fixing.

The FSA and BoE welcomed the findings and said it had already implemented a number of reforms. An FSA spokesman said: “We will study the report’s findings and Martin Wheatley will consider it as part of his Libor review.”

However, the BoE said in a statement that it welcomed findings that it was not responsible for Libor.

Denis Mitchell, managing director of Cornwall-based Demelza Lifestyle Financial Planners, said: “People’s confidence was already tested with the credit crunch. To find out this Libor issue has gone on as well has further undermined confidence in the banks.”